Switzerland has received a stern warning from a group of experts regarding the need to prepare adequately for the potential failure of a major bank. This advice comes in the aftermath of the collapse of Credit Suisse, a once-proud symbol of Swiss financial strength. The failure of this global banking giant caught Swiss officials and regulators off guard, despite their long-standing struggle to manage the bank through a series of scandals.
On Friday, a panel of Swiss experts, consisting of bankers and academics, issued a series of recommendations to the government aimed at enhancing the nation’s preparedness for a similar crisis, particularly concerning UBS Group (UBSG.S), which has now become Switzerland’s largest bank following a government-supported takeover of Credit Suisse earlier this year.
The experts advocated for empowering the country’s regulatory body, FINMA, with increased authority, including the ability to impose fines. They emphasized the importance of FINMA being more proactive and having better coordination with other Swiss authorities. Furthermore, they proposed closer engagement between FINMA and bank executives before a crisis occurs.
Another key recommendation was to facilitate banks’ access to central bank funding by relaxing the rules governing the collateral they can offer in return. It’s worth noting that these recommendations are not legally binding and may face challenges in gaining traction. The Swiss National Bank (SNB), a powerful central bank, expressed disagreement with certain aspects of the suggestions, particularly related to liquidity and the functioning of authorities.
The takeover of Credit Suisse by UBS, marking the first global bank rescue since the 2008 financial crisis, has significantly strengthened UBS’s position, essentially eliminating its primary rival. This development is poised to reshape the Swiss banking landscape, where branches of Credit Suisse and UBS are often found just meters apart. Together, these two systemically important banks hold assets equivalent to 140% of Swiss GDP in a nation heavily reliant on the financial sector.
The collapse of Credit Suisse has sparked an international debate about the efficacy of reforms implemented after the 2008 financial crisis to prevent banks from becoming “too big to fail.” Switzerland, despite imposing losses on shareholders and certain bond investors as part of those reforms, opted to sell Credit Suisse to UBS rather than wind it down, a decision criticized by some within the country.
Critics argue that Swiss policymakers failed to adequately oversee Credit Suisse over the past decade, leading to its downfall. However, there appears to be limited political will to draw lessons from this experience. Nicolas Veron of the Peterson Institute for International Economics in Washington warned that Switzerland could face significant challenges if UBS encounters financial trouble, as there is no equivalent fallback plan to the Credit Suisse merger in place.
Interestingly, during the 2008 global financial crisis, it was UBS, not Credit Suisse, that required a state rescue. The Swiss central bank provided substantial support to UBS by lending over $54 billion to a vehicle used by UBS to offload problem debt, including subprime loans.